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Capital Gains Tax: the facts on valuation.



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MEDIA RELEASE

 

HON GARETH EVANS QC MP

Deputy Leader of the Opposition and Shadow Treasurer

 

7 September 1998

 

CAPITAL GAINS TAX: THE FACTS ON VALUATION

 

The Coalition has been dishonestly portraying Labor’s reform to Capital Gains Tax (CGT) as involving a significant cost to investors because of the need to value assets before 1 January 1999. This is simply not the case. Nobody will have to have a valuation of their assets done before 1 January 1999: the requirement is simply that, when the asset is sold, there be a valuation available as at that date.

 

The overwhelming majority of asset holders will be able to obtain a valuation at nil or negligible cost, as set out below. Should investors choose to obtain professional valuations, the valuation costs will be included in the cost base of the asset, making it effectively tax deductible against any future CGT liability.

 

Here are the facts on obtaining a valuation of an asset as at 1 January 1999:

 

Listed shares, units in a unit trust and so on - the values of these are published in the newspaper. Cost to investor: nil.

 

Shares in a private company, units in a private trust or partnership rights in a partnership may be valued in either of the following ways:

 

- the net tangible assets of the business (as r eported in the most recent business balance sheet) pro rated appropriately. Cost to investor: negligible; or

 

- an independent valuation by an appropriately qualified person such as an accountant. Cost to investor: the professional fee.

 

Farms may be valued in either of the following ways:

 

- farm values are estimated periodically for ratings purposes by local government authorities. The Commonwealth will provide standard adjustment factors (to be worked out for each rural area by the Commonwealth) by whi ch a rates valuation would be adjusted for CGT valuation purposes. Cost to the farmer: nil;

 

- in addition, farmers may choose to use an independent valuation obtained for some other purpose within the previous year ie from 1 January 1998. The cost of this option would be nil;

 

- of course, farmers will be free to obtain an independent valuation if they choose.

 

Income producing properties, other than farms . Property owners will have the option of estimating the value of the property by adding the land value (as valued in local government rates) with the insured value of the buildings;

 

- alternatively, an independent valuation may be obtained. This can be achieved by a licensed valuer, which will involve a valuation fee. As a further option investors may choose to use an average of three separate real estate agents’ valuations of a property. Real estate agents regularly provide valuations at nil cost;

 

- in addition, investors may choose to use an independent valuation obtained for some other purpose with in the previous year ie from 1 January 1998. The cost of this option would be nil.

 

Personal use assets eg valuable works of art, expensive jewellery and so on . Where such items acquired since 20 September 1985 are already subject to the CGT, equivalent items acquired before this date will need to be valued. Such items are invariably insured, with the value being regularly reassessed for insurance purposes. The insured value may be used for CGT purposes if the investor chooses. Cost to investor: nil.

 

So for all investors a simple and inexpensive method for valuation of their assets is available.

 

In contrast, the Howard Government is proposing to increase the cost of all future valuations by accountants, valuers, lawyers, engineers, surveyors, real estate agents and so on with a GST.

 

Contact: Margot Marshall 0419 497 103

 

Capital Gains Tax Information Sheet

 

What is Labor proposing to do?

 

Labor is proposing to make the tax system fairer by ensuring that all capital gains are taxed in the same way. We will remove the exemption from capital gains tax on assets bought before 20 September 1985. From 1 January 1999, all future increases in value of assets acquired before September 1985 will be subject to capital gains tax.

 

Why is Labor doing this?

 

Capital Gains Tax was introduced in September 1985 to stop high income earners avoiding income tax by taking their income in assets like shares or real estate.

 

The current CGT provisions quarantine all assets bought before September 1985 from any capital gains tax. But a similar asset bought after September 1985 is taxed on any increase in value.

 

The current exemption was made to allow the community to become accustomed to the new tax. But it provides an unfair windfall to those who continue to hold assets acquired before September 1985.

 

The new rules will treat all taxpayers in the same way.

 

This reform will make the tax system fairer because it ensures that where people earn capital gains they are subject to tax just like any other income.

 

Does this mean that Capital Gains Tax will apply to the family home?

 

No. The family home is not subject to capital gains tax, and will not be subject to CGT in the future. The family home is exempt from capital gains tax.

 

Does this mean that Capital Gains Tax will apply to the family farm?

 

No CGT applies to the family farm homestead. As with the family home, an exemption applies to the family homestead and the grounds around it.

 

What about the business assets of a farm?

 

Business assets are currently subject to CGT. The business assets of a farm - for example, the sheds and paddocks - bought after September 1985 are currently subject to CGT, like the assets of any other business in the city or a country town.

 

This measure will apply CGT to business assets - whether farm business assets, or any other business assets - acquired before September 1985, but only on any real increase in value after 1 January 1999.

 

What if a farmer bequeaths the family farm to his or her children? What if he gives it to his children?

 

If a farmer dies and leaves the farm to his or her children, there is no tax payable.

 

If a farmer gives the farm to his or her children there is no tax.

 

However, if a farmer sells the farm then any real gain from 1 January 1999 w ill be subject to tax like all other assets.

 

If the farmer sells the farm and buys another farm or business, then CW rollover provisions mean no tax is actually paid.

 

Will the pre- 1985 assets be taxed on the increase in value between 20 September 1985 and 1 January 1999?

 

No. These gains are absolutely tax free.

 

What will happen on 1 January 1999?

 

All assets bought before 20 September 1985 must be valued as at 1 January 1999. That does not mean that they have to be valued before that date.

 

Will asset holders have to incur costs in getting such a valuation?

 

The overwhelming majority of asset holders will be able to obtain a valuation at nil or negligible cost. The situation varies with the type of asset involved:

 

* Listed shares, units in a unit trust and so on - the values of these are published in the newspaper. Cost to investor: nil.

 

* Shares in a private company, units in a private trust or partnership rights in a partnership may be valued in either of the following ways:

 

- the net tangible asset s of the business (as reported in the most recent business balance sheet) pro rated appropriately. Cost to investor: negligible; or

 

- an independent valuation by an appropriately qualified person such as an accountant. Cost to investor: the professional f ee.

 

* Farms may be valued in either of the following ways:

 

- farm values are estimated periodically for ratings purposes by local government authorities. The Commonwealth will provide standard adjustment factors (to be worked out for each rural area by t he Commonwealth) by which a rates valuation would be adjusted for CGT valuation purposes. Cost to the farmer: nil;

 

- in addition, farmers may choose to use an independent valuation obtained for some other purpose within the previous year ie from 1 January 1998. The cost of this option would be nil;

 

- of course, farmers will be free to obtain an independent valuation if they choose.

 

* Income producing properties, other than farms. Property owners will have the option of estimating the value of the properly by adding the land value (as valued in local government rates) with the insured value of the buildings;

 

- alternatively, an independent valuation may be obtained. This can be achieved by a licensed valuer, which will involve a valuation fee. As a further option investors may choose to use an average of three separate real estate agents' valuations of a prop erty. Real estate agents regularly provide valuations at nil cost;

 

- in addition, investors may choose to use an independent valuation obtained for some other purpose within the previous year ie from 1 January 1998. The cost of this option would be nil.

 

* Personal use assets eg valuable works of art, expensive jewellery and so on. Where such items acquired since 20 September 1985 are already subject to the CGT, equivalent items acquired before this date will need to be valued. Such items are invariably insured, with the value being regularly reassessed for insurance purposes. The insured value may be used for CGT purposes if the investor chooses. Cost to investor: nil.

 

Will valuations be tax deductible?

 

The cost of any professional valuation will be incl uded in the new cost base of the asset, making it effectively tax deductible against any future CGT liability. For example, if it costs $500 to value a block of flats worth $500,000 on 1 January 1999, the new cost base for CGT will be $500,500.

 

Is this an example of retrospective legislation?

 

No. Only increases in value after 1 January 1999 will be subject to CGT. All past gains are tax free.

 

Can you give me an example of how it will work?

 

In 1980, John paid $20,000 for 10,000 bank shares at $2 each.

 

On 1 January 1999, these shares have gone up to $10 a share, and are worth $100,000.

 

John sells his shares on 1 January 2003. They are now worth $12 each and he sells them for $120,000.

 

Selling price

$120,000

Minus Baseline valuation

$100,000

Minus Infl ation discount

$10,000

Capital gain

$10,000

 

John will pay capital gains tax on his real, post inflation gain of $10,000.

 

 

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